NEW DELHI: The finance ministry is mulling the option of starting this fiscal's Rs 40,000-crore divestment programme with share buy-backs, according to an official. The government's selloff programme runs the risk of going awry if it comes out with offer for sale (OFS) issues at a time when the stock market is choppy.

With shares of state-run companies listed for divestment trading low, an auction of shares now is unlikely to fetch the government its targeted revenue.

"There will be a lot of opposition but we will ask the disinvestment department to initiate discussions with key administrative ministries for buybacks," the finance ministry official, who did not want top be named, said.

A buyback, or repurchase, of shares in state-run companies that have large cash balances (after capital expenditure plans have been taken into account) is a tool the government may use to meet its divestment target. It is currently drawing up a list of companies where this option can be exercised.

"Once the companies announce their annual results, we will take a stock of the situation and proceed accordingly," the official said.

The 20,000-crore Coal India offer could come in the second quarter, the official added. Last fiscal, LIC, the country's largest insurer, had to bail out some of the OFS issues to help the government reach its revised disinvestment target of 24,000 crore.

In 2012-13, the government had allowed PSUs to buyback shares using their surplus cash or buy minority stake in other PSUs with whom they have strategic business relationship. The government is of the view that buyback of shares will provide for sustained investor interest in PSUs, and also protect their market capitalisation.

Besides, such disinvestment will not disturb the secondary market share price of state-run companies lined up for disinvestment.

The administrative ministries and the state-run companies have cold-shouldered the idea, as they are keen on retaining their cash surplus for capital expenditure plans.

Some analysts say that at a time when a lot of promoters are buying back shares in a depressed market, the strategy may work out for PSUs as well. "There will be a positive impact on the stock prices, but it will be short term," said Gautam Trivedi, head of equities at Religare Capital Markets. Trivedi, however, added, "It will defeat the government's divestment agenda, which is to increase the free float of PSU firms."

Earlier this year, P Chidambaram had told the heads of PSUs to be ready to shell out special dividends if they do not invest their surplus.

But as per the Union Budget for 2013-14, all major PSUs are expected to miss their capital expenditure plans for 2012-13. While SAIL is likely to miss its capex target by over 17%, that for Coal India is likely to be around 4%.

"Companies need to decide whether they want to buyback shares or let the government offload stake and in the market, in which case their stock price takes a beating," an official of the disinvestment department said.

"In the long term, if their market capitalisation is good, they will be able to raise funds from the market at cheaper rates," he added.

According to a research note by Kotak Securities, the government should explore the option of higher dividends from cash-rich PSUs rather than selling them at depressed valuations.

The report cites growing concerns over use of cash as one of the reasons for the weak performance of PSUs over the past one-two months.

It says that the government intends to use the cash balance of the public sector units as a way to kick-start the capex cycle and the market has fears of PSU companies being made to invest in non-core businesses.